Low-income and vulnerable insurance customers are finding themselves in “a lose-lose situation” when it comes to taking out insurance, a report has said.
Co-published by the Institute and Faculty of Actuaries and steering group Fair By Design, the report said these customers were facing a degree of market failure but were “unable to sufficiently prove a market failure to the government and regulators, and unable to take any legal action”.
As a result of insurers’ risk-based pricing - a process which is increasingly becoming more individualised - the report argued low-income and vulnerable consumers continue to face higher premiums, or are refused insurance altogether, due to the greater risks they pose.
The report highlighted concerns shared by consumer advocates over insurers potentially being “in breach” of the Equalities Act, passed more than 10 years ago.
But finding the data to prove this “breach” to the government and regulators is tricky, it said.
“Consumer advocates have stated that they are often not able to obtain enough information from insurers about how assessments are made or what data sources have been used,” the report stated. “They have called for this lack of transparency to be looked into.”
Through a Treasury Select Committee inquiry in 2019, the Financial Conduct Authority found several insurance firms were unable to provide immediate answers on the algorithms which sit under their pricing, how they compile data, and whether each piece of data was compliant with the Equalities Act.
The financial watchdog has since announced its Customer Duty principle, set to come into force next year. It is designed to ensure financial services products across the board provide fair value, which translates to a fair relationship between the price the customer pays and the quality of benefits and services they receive.
But without a clear view of the data insurers use to price their products, consumers will find it hard to prove whether this relationship is fair or not, the report argued.
“Consumers and their advocates have reported that they cannot assess whether a high or unaffordable premium, or an insurer’s decision not to offer cover at all, is reasonable or fair,” it said.
“They believe that this leaves them in a lose-lose situation – unable to sufficiently prove a market failure to the government and regulators, and unable to take any legal action.”
The report has called for a number of industry changes. One would see the end of monthly payment premiums paid by people who cannot afford to purchase an insurance product in one payment.
Another proposed the UK government facilitate the delivery of a “minimum level of protection” through the use of social policy interventions in an effort to close what they have called the insurance industry’s “poverty premium”.
A problem before the pandemic, the “poverty premium” is only set to widen post-pandemic according to the report, as the government’s furlough scheme comes to an end and the UK’s inflation rate continues to sit above the bank’s target.